Update on Climate Change

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This note is an update to the climate change article from last year.  The story hasn’t gotten any better, but there is enough that’s new to warrant a revisit.

The most fundamental piece of bad news is the opening figure, which comes from the Global Carbon Project.  After three years of seeming stability, the world production of carbon dioxide increased significantly in 2017.  (The figure says “projection” just to indicate that the final computations are in process.)  Without too much evidence we might as well call that the Trump bump.  As we noted last time, worldwide unanimity on climate change is important precisely because the advantages of cheating are so obvious.  We—with probably the most to gain from the Paris Agreement process—are the cheaters in chief.  So it’s not surprising others will have fewer second thoughts as well.

We have to put this change into perspective.  Even a stable value of CO2 emission means things are getting worse, because it is the total amount of CO2 in the atmosphere that drives temperature change, and it all adds up.  The stable value was attractive, because it seemed to indicate that CO2 had finally peaked and might start to decline.  And the decline might mean the total CO2 could be bounded.  We’re now back to worrying about the peak, with no idea how bad things will get.

Two more new slides from the Global Carbon Project show what we stand to gain from Paris Agreement unanimity.  The first shows the current per capita production of carbon dioxide.

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As has been true for many years US per capita usage sits way above everyone else, more than twice both Europe and China.  That is a direct expression of our carbon-powered standard of living.

The second slide shows who is going to have to make changes to protect that US standard of living from the effects of climate change.

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This shows that the major growth in carbon dioxide production is not from the biggest economies (note that even China has stabilized), it’s from the have-nots trying to achieve some fraction of our standard of living.   We are asking them to ignore not only our past exploitation of fossil fuel resources but even our current high per capita use and to delay their own immediate hopes for a better life in order to make the world a safer place for everyone.  So much for the question of who benefits from the Paris Agreement process!

That introduces the next topic—public attitudes to climate change.  There were enough strange weather events in the past year to give people pause, so we’re getting close to—but still not over—the hump.  The latest poll numbers have both good news and bad.  First the good news:

Overall, 45 percent of those surveyed said global warming would pose a serious threat in their lifetimes, the highest overall percentage recorded since Gallup first asked the question in 1997. Despite partisan divisions, majorities of Americans as a whole continue to believe by wide margins that most scientists think global warming is taking place, that it is caused by human activities and that its effects have begun.

Then the bad—the improvement is only partisan:

Gallup asked whether people agreed that most scientists believe global warming is occurring, and 42 percent of Republicans said yes, down from 53 percent a year earlier and back to a level last seen in 2014. Just 35 percent of Republicans said that they believe global warming is caused by human activities, down from 40 percent.

This seems like another proof of a much-discussed feature of human nature—when people are confronted with proof that their beliefs are wrong, they double down on defending those beliefs.   Unfortunately those are the people running the show.

How can turn that around?  A recent Steven Pinker book made an interesting point.  Much of the rhetoric around climate change focusses on conservation and a new world view of collective responsibility.  But actually conservation isn’t really the main point—since we’re not repealing the industrial revolution, the main point has to be new energy sources.  We’re not creating a new world where no one drives Chevy Suburbans anymore, we’re just changing the power source.  Conservation, however important, is about buying time until we can get there.  Perhaps that’s one way to get climate change out of the culture wars (as it should be).

In any case the focus has to be on the reality of climate change, and everything else is tactics. With tactics it’s easier to be bipartisan.   One indication is that Congress, over Trump’s objection, passed a bill continuing tax breaks for solar, nuclear, geothermal, and carbon-capture projects.  This effort united left-wing and right-wing approaches to climate change largely under the radar.  However, it must be recognized that even with such efforts the US is now lagging far behind in support for the technology of climate change.

Carbon capture (separating out CO2 and storing it underground or elsewhere) deserves some special mention, because it has become a bigger topic in the past year.  On one hand this is an idea that has been around for decades without going very far, and what’s more the coal industry supports it as a lifeline.  On the other hand the technology seems to be improving, the Obama administration supported it as a transitional technology, and even the IPCC climate studies assume some form of it will be used.  It currently exists as a very expensive add-on for power plants, and some still-speculative variants have been proposed to pull carbon dioxide straight out of the air.  Both the power plant and out-of-the-air applications have a common need for CO2 storage technology, of which there are many variants.

The biggest issue with carbon capture is that it can be (and is being) used to delay doing anything about climate change—why worry about carbon getting into the atmosphere if we’ll pull it all out later.  The problem is that the technology still has such big questions about cost and scaling, that “later” could be very late or never.  What you have to say is that the technology investment is necessary and at worst it at least gets the climate dialog past the hoax stage.  And if we could just get the Kochs interested in that business (which is largely oil industry technology), it would settle the Republican perception of climate change once and for all!

Returning to reality, we have to conclude the past year seems like a pause for progress.  After Trump took the US out of the Paris Agreement, many wanted to talk about all that could be done to maintain momentum nonetheless.  The chart at the beginning shows the limits of that point of view.  There are other indicators as well:

– The auto industry’s step back from future fuel efficiency standards

Exxon’s declaration that climate change is no risk to their profits

– Business as usual in the International Energy Agency’s World Energy Outlook:

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– Even the new preoccupation with carbon capture has to be viewed as a vote of no-confidence in the progress of conservation.   If prevention isn’t going to happen, then repair is all we’ve got.

What’s more than there has even been a preoccupation with a more drastic step, so-called geo-engineering.  This means injecting chemicals or particles into the atmosphere so as to dim the sun and cool the earth despite the increasing CO2 concentration.  There are many risks:  continuing ocean acidification, reduced photosynthesis and food supply, and weaponization of the technology.  Since CO2 would continue to accumulate, any loss of protection would have disastrous effects.  These are desperate measures.

As to what we should be doing, the picture is not too different from last year, but we can be perhaps more explicit.

  1. Because burning carbon is now recognized to have definite costs (i.e. whatever is necessary to counteract the CO2 increase), we need some kind of carbon tax so that the free market economy can react correctly. Since that cost is not currently captured, our economy is incurring a significant distortion that needs to be fixed.
  2. We need to get back into the Paris Agreement process to return focus to the goal. To repeat the obvious, the Paris process was always intended to be iterative—with countries readjusting their goals to eventually reach the target. We’re only at step one, so we had better help the world get back on-track.
  3. We have to recognize that at this stage we’re in no position to judge winners and losers among contributing technologies. So the solution has to be all of the above: nuclear, solar, wind, geothermal, batteries, carbon capture, even substituting gas for coal as a temporary measure.  The IPCC gave us what they called a carbon dioxide budget—the amount of CO2 we can add and still stay below a global temperature rise of 2 ⁰ C.  In 2014 (the year of the report) it was 800 giga-tons.  It is now below 700.
  4. People have to recognize that despite confusing news reports, we are all in this together. Some people will be hit by sea-level rise, some by drought, some by sheer temperature, some by storms, some by an effect we haven’t seen yet. Some may even be a little later.  But ultimately there’s nowhere to hide, and even “later” comes fast.
  5. There is no excuse for not funding research in all the contributing technologies and also research to understand the climate effects we are going to live with for however many years it takes to get past fossil fuels.
  6. Ideally all elements of society should be involved in planning such major changes. The carbon tax will help make that happen, but it’s not the whole story. We can’t keep fighting about this.

This administration likes to talk about itself as bringing business practices to government.   The evidence for climate change is such that any reasonable business would be doing its best to quantify the risk, so as to take appropriate action.   Businesses that choose to ignore disruptive new technologies or entrants are the ones that disappear—along with their disparaging comments on how the new stuff will never amount to anything.  Unless we choose to wake up—that’s us.

It’s time to be real.

 

Yet Another Gift to China

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The first point to make is that the current hysteria about a trade war with China is parallel to what happened a few months ago with North Korea.  Then we had weeks of unhinged bluster that kept the press busy around the clock.  Finally it dissipated without a trace when Trump gave in to Kim’s request for a meeting—ignoring all of his and other Presidents’ demands for preconditions.

Trump had his weeks of media-certified toughness and was on to the next photo op.

(It’s not clear what will come out of the meeting, but if the South Korean trade deal is any model—it takes very little to put on a media show of triumph.  Also, it’s hard not to wonder what would happen if the two Koreas got together and decided to keep the nukes.  After all, Trump campaigned on a platform of forcing allies to take full responsibility for their own defense!)

A trade war with China is a God-given opportunity.   The Chinese have already announced as yet unspecified trade openings for the West.  So the punch line is already there—all that’s necessary is the prelude.  We’re currently getting our full-scale dose of Trump toughness on trade.  Every time the stock market goes up or down it’s just that much more publicity.  And the conclusion will be a triumphant proof of Trump’s populism for the mid-term elections.  But since Trump needs a deal, that means—as with Kim—that the Chinese are running the show.

As we’ve noted here before, this is a critical time for negotiation with China.   The West needs to be united in setting the stage for what could be a major period of international growth.  By definition this needs to be done within the framework of the WTO.  Instead of that, however, we have Trump claiming a “national security” exemption for every act of his trade war—thereby undermining the whole notion of WTO-based standards for trade.

There’s just nothing that won’t be sacrificed to a photo op.

The Great Trump Korean Trade Deal

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As usual we need to put two and two together for these announcements.

  1. The biggest, highest profile provision of the deal is the raised limit on the number of cars each American manufacturer can sell in Korea. However, no American manufacturer has come close to the current limit.
  2. American auto manufacturers have recently made clear how interested they are in foreign markets. The industry’s lobbying group—the  Alliance of Automobile Manufacturers—recently released a report full of fabricated challenges to the idea of climate change in support of a regulatory request for relief from new auto emissions and fuel economy standards.

In other words they’d rather come up with the next SUV—a product niche initially unique to the US—than fight it out in the more competitive international market where such standards hold sway.  (Even the Korean deal actually had to include an exemption from such rules, or we couldn’t sell anything!)

So we have theater instead of economic policy.  Too bad we can’t just export media events.

For the Economy—Stop the Tantrums and Look

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To forestall expectations—this article is not about Trump’s daily antics.  It starts with a basic fact from Dani Rodrick (no cheerleader for globalization).  He talks about asking students a simple question: Would you rather be rich in a poor country or poor in a rich country?

…think of a rich person as someone in the top 10 percent of a country’s income distribution while a poor person is in the bottom 10 percent.   Similarly, a rich country is in the top decile of all countries ranked by average income per person while a poor country is in the bottom decile of that list.

The correct answer is “Poor in a rich country”—and it’s not even close.  The average poor person in a rich country, according to my parameters, earns three times more than the average rich person in the poor country ($9,400 versus $3,000 adjusted for differences in purchasing power across countries).  Disparities in other aspects of well-being, such as infant mortality, go the same way too.  The poor in a rich country have it much, much better than the rich in the poor country.

Students get it wrong because they don’t realize what a minute share of society those BMW-driving superrich represent—no larger perhaps than one hundredth of 1 percent of the total population.  When we expand the numbers to cover the full top 10 percent of a typical poor country, we have come down to income levels that are a fraction of what most poor people in rich countries make.

There’s a lot here that’s relevant, but the most basic message is that when you make the pot bigger, things ought to get better for everyone—even in the most extreme cases.

We live in time period where the pot is getting bigger all over the world, and especially in the hugely populated countries of China and India.  So the right question to ask is NOT “how can we stop those people from stealing from us?” but “why are we not making things better for everyone?”  As we’ll see it is a useful question to ask.

The major changes going on in the world are technological.  Technology has made production of many goods both cheaper and ever easier to locate anywhere.  There are good (and increasingly many) jobs in that world, but they are not the same jobs.   Some jobs get replaced by technology, some jobs get moved to places where labor is cheap enough to compete with the next level of automation.  In both cases they cease to be good jobs.   As with other such cases in the past, the social dislocations are enormous—but they are only as bad as we make them.  And the best way to make matters worse is to pretend the changes don’t exist!

In this country we have both the rhetoric and the policy of such delusion.  We’ve gotten out of the business of helping people who lose jobs in the blind belief that a happy private sector will take care of it.  In fact, people are going to lose jobs and find their skills devalued through no fault of their own.  Further, with the changing economy, education is for most people the necessary path to a good job and a viable financial future.  However we have become alarmingly hostile to it, underfunding it and looking for reasons to limit it to the targeted “vocational ed” that seems to be in the air.  And internationally our response to problems of dislocation has been a tantrum:  everyone is out to get us, so we’ll take our marbles and go home.

The rhetoric says that Mexico and China and …  have caused an epidemic of depression, joblessness, and despair.  That’s self-destructive blindness.  (The worst thing about globalization is all that can be blamed on it!)  We did it.  We refused to recognize the technological dislocation we’re living through, so we provided no help, blithely punting to the private sector.  However, private sector expansion and even tariffs are false hopes for jobs that aren’t economically viable.  We have to support people, and as much as possible get them on a new track.  And we particularly need to make sure that the next generation doesn’t suffer for it.

That takes money, but it’s not as if we don’t have any.   We’ve just devoted $2.2T to a corporate tax cut that is nothing more than a misguided subsidy to have the private sector solve this very same problem!  (We know now that the money is going instead to investors, primarily via stock buybacks.  Real tax reform is another subject and can be close to revenue-neutral.)  We have to spend it on the people who need it and on education and infrastructure.

And for the rest of the economy, things aren’t so bad out there in the real world.

First of all, even before the tax cuts, our corporations and our upper tier of incomes have been doing just fine.  There are problems for people, middle class and below.   But there’s no indication that the technology-driven side of American business is going anywhere but up.

Second this is a period of unprecedented geopolitical opportunity.   China has finally reached the point where it is a viable market for the West and with an incentive to act that way.   There has been so much rhetoric about China that even the basics get lost.  China has been a statistically poor country for a very long time.  Its economic development has been export-directed and they do have some shady practices, but China’s ability to absorb imports has been limited at best.  That is no longer true, and China recognizes that its economic interdependence with the West requires a new relationship.  Given China’s size, the opportunities are real—which is to say that if we play our cards right the pie should get bigger for everyone .  (A more recent NY Times piece also makes that point.)  And given the speed and magnitude of technological change, the pie should continue getting bigger for a long time.

In some ways you can compare our situation to the world in the 1950’s.  European countries had lost their colonies and their predominance, and they had to recover from the damage in the war.  It was a rough transition, but they ended up far better off than they had been before.

We are living through a time of major transition.  We are well-positioned, but we have to help some people through it.   And with more players we may not always be so overwhelmingly predominant as we are today.   But this is an extraordinary future for us and everyone else.  We just have to be willing to open our eyes and get it.

Another Gift to China

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Trump’s latest tariffs on steel and aluminum were announced to combat unfair trade practices from China.  The first problem with that explanation is that China is no better than 11th on the latest list of steel exporters to the US!

The craziness of the action, however, just goes on from there.   According to the steel industry itself, the major problem with steel today is overproduction in China leading to overcapacity worldwide.  That’s a problem for every country that produces steel.  As the NY Times pointed out, if we were really serious about Chinese behavior, there are plenty of other countries in the same boat, so collective—and effective—action is straightforward.  (The US actually has a good record of success with the WTO.)  Instead we’re going after those potential allies.   And as a matter of fact China has already pledged to reduce its steel production in response to such international pressure.   The new tariffs take the pressure off China by making the tariff wars, not the overproduction, the main issue.

The tariff proposal itself is particularly suspect, because it applies to all countries across the board.  We are by definition not responding to particular protectionist behavior in targeted countries.  Since we’re not punishing actual perpetrators, the proposed tariff is essentially a cheap way of financing subsidies to the steel and aluminum industries.  It’s perfectly rational for the steel industry to want a subsidy by whatever means.   But the President of the United States has an obligation to recognize that a shakedown of potential allies is not a good way to deal with an offender!

It’s worth saying a few words about fair trade.   First of all, it’s worth recognizing that making something better and cheaper is not of its nature unfair.  It is the task of trade agreements to define the rules of the game.  Dumping below cost is unfair.  Subsidies of all kinds are unfair (but can be hidden in many different ways!)    Sales restrictions are unfair.   Below standard wage arrangements or environmental rules are unfair.

China’s case is not unusual in its evolution, but it has reached historically unique proportions.   For many years China was basically an underdeveloped country, with a limited ability to purchase imports to match its export-directed production—regardless of whether its markets were open or closed.  As the Chinese economy has grown, however, the state has maintained that mindset despite the growth.  And the Chinese population—after Mao—sees the improvement as more than acceptable, and any serious labor agitation is a good way to get shot.

China still has the mindset—and per-capita production—of a poor country.  But the country is so big that its prosperous part is a huge market that should be opened to the rest of the world.   The upshot is that there is plenty to discuss about fair trade with China, and now is a good time (from the point of view of international leverage) to do it.  But instead we’re stuck with a trade war that will be damaging to everyone—including us—and real progress with China may get lost in the noise.

Even if we just want to focus on the steel industry, this didn’t have to happen.  The best way to help the American steel industry is to buy American steel.   Everyone agrees we have an infrastructure problem—in any reasonable world we would be using American steel to rebuild the country.  Instead that got sacrificed to private-sector fantasy in the budget.

The final and perhaps most serious subject is the way this is being done.  Trump has been able to set tariffs by fiat by claiming national security as motivation.  Normally, without this seldom-used national security ploy, tariffs are a matter for Congress.  That we’ve started this way is a scary first step.  And Trump has already announced how he is going to respond to possible European Union tariff retaliation—by large tariffs on imported cars.  You can hardly claim that is a national security matter—but it sure doesn’t seem like this government by fiat is going to stop!

So we no longer need to argue about whether Trump will or won’t try to make himself a dictator.  Unless something happens, he is already in position to wreck our economy all by himself.

The Budget and the Real World

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It’s worth asking the question—what exactly does all of our military spending do for us with North Korea?  They devote more of their GNP to weapons than we do, but we’re spending on more on military equipment and technology than the next 8 countries combined.  Is it solving the problem?  Would a few more aircraft carriers put us over the top?

How about the other obvious hot spots:   Syria, Afghanistan, even Iran.  Try to find one where aircraft carriers would fix it.

Since that didn’t seem to work let’s try a more general question:  what are the most obvious and successful military threats to America today?

Unfortunately the answer to that one is cyberwarfare:  both direct government action—such as disrupting elections, and private attacks (with government connections)—such as computer virus attacks.  The intelligence community has been explicit about that, since they’ve had to go public to get the administration’s attention.  Won’t get much out of aircraft carriers there either.

What is the major item in Trump’s budget?—traditional military equipment and people, including more aircraft carriers.  That not only dominates the thinking about the military, it dominates the thinking about all international relations, and it wipes out most other priorities in the budget.

As such it is emblematic of an even bigger problem.  We are refusing to understand the actual problems we face, so we end up wasting our resources instead of moving forward.  That’s no small problem; it’s the way nations die.

 

Let’s look at the economy.  Here’s some reality:

– American corporations are doing quite well, with record profits worldwide—driven primarily by America technological pre-eminence.  Newest companies, however, are not labor-intensive.

– The labor market is split.   People with the right skills are doing well, people without such skills find fewer jobs at lower wages.  With growing automation, globalization, and de-unionization, workers are weaker than ever in dealing with management.   The minimum wage has gone down in real terms, so that it is no longer a living wage.

– Education is in crisis.  Most of it is state-funded and the states are still trying to recover from the 2008 crash.  Underfunding has resulted in the student debt crisis and in debasing teaching as a profession.

 

Here’s what are we doing:

– A huge tax cut for corporations, because they supposedly can’t compete worldwide—a conclusion contrary to fact and relying on known deceptive statistics.  And anyone who thinks those new profits will be handed out as gifts to workers should look at history or the rise of the stock market!

– Reduced benefits for anyone who loses a job.  No interest in raising the minimum wage.  Appointment of anti-union judges to the Courts.

– An all-out attack on education.   We can’t waste money on anything but vocational education—the welders (382,730 jobs nationwide) and coal miners (50,000 jobs) from Trump’s State of the Union speech.  This at a time when people need both more specific knowledge and more breadth of knowledge for good jobs with ever-changing technology.   And of course vouchers will privatize education and help break the teachers’ unions—so we can save money there too!

– All-out attack on science, both in influencing government policy and as an independent enterprise.  Scientists removed from consultation roles in the EPA and elsewhere, cuts in government-sponsored research, and new taxes on major research institutions (as compared with tax cuts for businesses).  Climate change cannot be mentioned.

In other words we’re solving a non-existent problem for businesses (with a big present to investors) and at the same time abandoning the population (for both education and support) and denying the importance of the science and technology that have been our success.

 

The rest of the world has learned from us the value of an educated population and of moving forward wherever opportunity lies—but we’ve lost interest in that approach.  Instead we have a new religion of the unencumbered private sector as the solution to all problems!  As noted before, even Adam Smith himself wouldn’t sign up for that one.

This administration likes to talk about putting government on a business footing.  That’s just talk.  Businesses are hungry for facts and solve real problems.  Denying reality is the quickest way to go broke.

That can happen to countries too.

What the New Tax Law Means

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This note is about the effect of the new tax law on the middle class.  While much has been written on this subject, the focus has generally been too narrow to give the full picture.  It is important to get this right.

This note deals with three topics:

  1. Who really wins and loses with the tax cuts.
  2. How the tax cuts affect the economy.
  3. What about the corresponding budget cuts?

Most discussions of the tax law stop with item 1.  That is to put it mildly deceptive—as if the tax cuts were free money we just printed, and we’re only deciding how to divide up the proceeds.   That’s understandable from Republicans, but others shouldn’t let them get away with it.  Items 2 and 3 talk about consequences.  Item 2 affects everyone; item 3 needs to be analyzed to see how it hits the middle class.  However even the discussions of item 1 have understated the situation, so we start there.

  1. Who really wins and loses with the tax cuts.

Most discussions of this topic focus on the new rules for personal tax filing.  This is of course complicated because winners and losers are different in different states and with different levels of income or expenses.   For our purposes we assume that job has been done.  The NY Times has a handy calculator.  In the first year about 75% of payers get a tax cut, 25% pay more.  The median result over the entire population is a tax cut of $380.  By 2027 some cuts expire and virtually everyone pays more.

The first caveat is that this forgets that the federal tax isn’t the only tax paid. The new tax law has two conflicting effects on state taxes.   On one hand the limited deductability of state taxes has made taxation more expensive to the payers in high-tax states.  On the other hand the corresponding federal budget cuts will throw additional social welfare expenses back on the states.  States will have to choose between increased misery and tax increases.  Given the modest size of middle-class tax cuts, it takes little at the state level to negate them.

However the bigger part of the story is that we have left out two major pieces of the tax law.  One is the frequently-discussed new 25% rate on pass-through income.  We know it’s free money if your personal tax rate is higher, but it’s hard to quantify since we don’t know exactly who will use it.  With the armies of accountants hard at work on it, let’s just say that since the 32% tax rate starts at $315,000, you have to be at least borderline rich to cash in.

The remaining piece of the tax law is the huge corporate rate cut—the biggest part of the package.   The issue here is that the effects of corporate cuts have not been put in proper context.  On one hand we have Trump and Mnuchin talking about how the cuts will be worth $4000 for all workers (a number that very few regard as true).  But on the other hand the huge rise in the stock market (even after the recent retreat) is somehow taken out of scope—a benefit to everyone from the Trump presidency.  In fact the stock market rise is the primary rich-taxpayer payoff from the tax plan—and it has been a great deal!

There are several points to be made:

– The corporate tax cuts are a direct tax benefit to rich tax payers.

This is just arithmetic:  cutting corporate taxes increases profits and hence the financial value of what the investors own.   From the beginning, the expectation of tax cuts has been the primary driver of the stock market boom.  Since stock ownership increases dramatically with income (see the chart below), this means that the value of the corporate tax cut is hugely tilted toward the rich.

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It’s worth emphasizing just how skewed this is.  The chart shows 84% of stock is owned by the top 10% of taxpayers, but the top 1% own 40%.

– What about the bonuses to workers?

We’ve had a few public relationship announcements of benefits, but there’s no reason to expect this will represent a significant part of the tax cut effects.  At a qualitative level, one has to believe the stock market—which clearly thinks there will be no substantial loss of profits to wages.  In fact the recent stock decline was caused by the fear of inflation based on statistics showing a 2.9% annual increase in wages.  Shows how likely the business community is to put tax cut benefits into wages!  Even Mnuchin’s improbable $4000 was actually a long-term benefit (i.e. years out) based on estimates of productivity increases from projected new investments.

The link between the corporate tax cuts and investors benefits is immediate and direct.   The link to worker benefits is indirect and historically shaky.   The following unedited statement from a Cisco financial report is an excellent introduction to the real world:

“Because of the law’s corporate tax cut, Cisco plans to repatriate in the current quarter $67 billion parked in foreign banks. The company plans to spend the money on dividends paid to shareholders, stock buybacks and acquisitions.”  (With experience, we can now be even more explicit—thus far in 2018 corporations have spent $171B of tax savings on stock buybacks and $6B on employee bonuses.)

– What about jobs?

In 2004 the Bush administration granted a tax holiday for businesses to return overseas earnings.   Many businesses took advantage of the gift, but none of the promised increase in jobs materialized.  That was actually not surprising, because job increases go with new ventures—and the extra cash doesn’t create those opportunities.

The picture is even more tilted that way today.  The cost of capital has been so low, that it has been simply no impediment to investment.  Any reasonable project is fundable.  The corporate tax decrease, large as it is, doesn’t change that picture.  And even a little bit of inflation counteracts it entirely.

– Will the tax cuts bring international operations of businesses home to the US?

The corporate tax cuts mean that businesses will pay less tax than they used to for their operations in the US, so in that sense there is less disincentive for operations here.  However, the new tax rules mean that going forward businesses will pay NO tax on their operations overseas.  End of subject!

– What about foreign companies putting operations here?

That amounts to subsidizing their operations by our policies here.  Good for them, not so good for us.

– What about the corporate announcements of expansions in the US?

Corporate announcements are a little suspect, because it’s tempting to jump on the bandwagon for public relations reasons.  One obvious example is Apple who announced a $350 billion investment in America over a period of 5 years.  As it turns out Apple’s current annual domestic investment amounts to $275 billion over five years, so we’re down to $75 billion new.  In addition, with the new tax law Apple returned $252 billion from overseas to take advantage of the tax holiday rate of 15%.  That means 38 billion of the $350 went to taxes for a total new investment over 5 years of $37 billion.  Not such a big change and probably still somewhat inflated.

It’s also worth thinking a bit about that $252 billion in overseas saving.  That huge number for overseas assets is a tribute not just to Apple’s overseas business but also to modern accounting practices by which companies attribute profits to subsidiaries in convenient places.  The new tax law—with no tax on overseas operations—creates an even greater incentive for such creative profit shifting.  The new approach was sold as putting US taxes on the same footing as for the Europeans, who also don’t tax foreign profits.   However the Europeans have complex rules to avoid profit shifting, and those rules go far beyond anything in our new law.  So this is another really great deal for the investors!

Conclusion:  The direct financial effects of the new tax law are vastly to the benefit of the rich, and the greatest beneficiaries are the very richest.  In particular, it is incorrect to think of the huge corporate tax cuts as a general stimulus that rains benefits on everyone.  It is a tax present to investors who have shown via the markets that they expect to make out like bandits.  (Since this tax plan was pushed through by ultra-rich investors for their own benefit, the analogy is exact.)

 

  1. How the tax cuts affect the economy.

From the beginning this has been the most obvious concern with the Trump administration’s policies.  As we’ve noted before, the new tax plan is doing a massive, deficit-funded stimulation of an economy at essentially full employment while eliminating all oversight of speculation and other bad behavior.  That is a demonstrated recipe for disaster.  We’re only ten years from the crash of 2008, and we seem to have forgotten that such things really can happen.

The Trump administration is so intent on delivering its gifts to corporations and the ultra-rich that it cannot begin to think about matters of timing.  There is a confluence of evils.  For the Trump people, ignorance of economics and history makes them unaware they are playing with fire.   For the Koch-financed Republican Congress, enthusiasm for the unregulated greed of the nineteenth century makes them blind to the crashes and panics of capitalism in the wild.  From one economist recently: I think we should be very worried.  As a macroeconomic matter, I’m not aware of another example of this—of a country that’s basically at full employment embarking on massive fiscal stimulus.”  And he hasn’t even gotten to the demise of financial oversight!

It is worth thinking a little about other ways the administration’s stated goals could have been achieved.  The average effective corporate rate for the US is not the statutory 35% but more like 24%, which is not so far from the developed-country average estimated at 21%.   Real tax reform would bring the effective and nominal rates in closer line with each other–with the advantage of removing artificial lobbyist-created inequities in the tax plan.   That, with adjustments to assure parity with other countries, would not have broken the bank.

Such a plan would have been in line with the revenue-neutral tax reform achieved with bipartisan support under Reagan in 1986.  It would have allowed the country to address its real and pressing problems (see the next section), it would have minimized inflation and growth of the deficit, and it would have avoided the catastrophic risk just described.

Conclusion:  We need to stop some part of this train wreck waiting to happen.

The tax plan actually shows Trump’s dedication to fighting climate change.  Thus far the only year when carbon dioxide production actually fell was when the world economy collapsed in 2008.   Trump is out to beat that one!

 

  1. What about the corresponding budget cuts?

One way to think about this subject actually comes from Trump’s State of the Union speech.  Towards the end of the economic discussion Trump turned dreamy (“we’re all dreamers!”), stared into the air, and talked about how the new America is the place for young people to start off building their lives.

Like much of Trump’s rhetoric this was a call for people to think back to the good old days of the (idealized) 1950’s and 60’s, the days that Trump wants us to think he is recreating.  We should talk about those good old days, the reality for young people starting off in Trump’s America, and what really ought to be done about it.

First about those good old days:

Employment:  This was an era of strong unions, with corresponding good wages and working conditions.  Companies offered lifetime employment.  Employment was a clear path to a middle-class lifestyle.

Medical care:  Affordable without worrying too much about it.  Coverage built around employment.

Education:   The GI bill had sent people of all kinds to college for the first time.   The state university system in full expansion made college affordable.  Everyone’s kids get a newly-won chance to do anything.

Retirement:  Companies offer full pensions, based on years of lifetime employment.

Infrastructure:  New and enhanced through public spending.  The interstate highway system is a key new achievement.

Environment:  Getting better as we begin to pay attention to it via the newly-formed ecology movement with bipartisan support.

International:  The world had learned that war was a bad idea.  International institutions formed to diffuse it and to prevent another depression.

Overall this was a time of confidence—as long as you weren’t black!  People could feel sure that they knew how to create a life trajectory for personal success and for their children.

 

Let’s revisit those topics now in light of Republican policies in general and the tax cuts in particular.

Employment:  Unions have lost power in most industries.  Globalization and (even more) automation have changed and are continually changing the nature and number of good jobs.  Lifetime employment is rare.  The “Gig economy” has few benefits.  Compensation has a very large range with the minimum wage unchanged for 15 years.  There is a current threat of a new round of job losses from artificial intelligence.  Overall—employment is uncertain and not a guarantee of a middle-class lifestyle.  And if you lose your job you lose everything.

Republican policy>> The administration is actively hostile to unions and to regulation of working conditions.  For other issues Trump has pegged everything to his stimulus of the economy and his renegotiating of the trade agreements.  That resolves few of the problems just mentioned.  In the State of the Union speech Trump talked about retraining, but thus far has announced only cuts to existing training programs.  There’s no room in the budget for government-funded jobs programs, including especially infrastructure (discussed later).  Hostility toward government-funded research is a bad sign for the future.

Medical care:   Medical care has become a huge part of national spending and a major worry to most people.   Prior to Obamacare there were 500,000 medical bankruptcies per year in the US, most for people who thought they had insurance.   Obamacare was a first step to move beyond an expensive, dishonest, inequitable, and incomplete non-system.  Obamacare was of course financed with a surtax on higher incomes that has been a primary Republican target.   Obamacare isn’t dead, but Trump has tried to kill it through a number of measures to raise its cost and create uncertainty about its operation.

>> Republicans have tried for years to get out of the healthcare business.  Trump’s healthcare promises made them create proposals, but none were serious.   The first two killed the surtax directly, and the third pushed responsibilities to the states with diminishing federal funding.    The recent Medicaid waiver action allows states to cut medical services, since that improves the recipients’ lives by making them more self-reliant!

The tax bill removes the Obamacare healthcare mandate, which undermines the insurance pools and increases costs for those remaining.  Further Paul Ryan has announced that the tax bill deficit means going after Medicare.  Trump recently acknowledged the opioid crisis, but provided no funding to do anything about it.

Education:  State financing of education has never recovered from the 2008 recession.  One consequence is the college student debt crisis, and state funding of K-12 education is also down.

>> In a reasonable world the federal government would act to support the financially-strapped, state-based education system.  Instead, with the rising state social service burden, the tax plan puts the states under even more stress.

The Republican party has turned alarmingly anti-education—for the public system.  Trump’s State of the Union speech mentioned only “vocational education” as an issue, and there have been calls not to waste taxpayer money on anything else.  There’s nothing wrong with vocational education, but it’s not the whole picture, and there’s no indication that public officials are choosing exclusively that for their own children.  Further, Trump’s budget proposal takes money away from public schools to kick-start the DeVos voucher system—with educational quality sold to the highest bidder.

The tax bill has no money to fix the student debt crisis, but it goes out of its way to provide a new tax deduction for private school tuition payments!  We are in danger of losing the legacy of the GI bill to a new notion of “good enough” for the public system. This is bad both for individuals and for the country overall.   Other countries have now long recognized what we used to know—broad-based educational success drives prosperity.  Our once-best upward mobility made us what we are.

Retirement:  Companies don’t do it anymore.  Most soon-to-be retirees have little savings.

>> The tax bill deficit means Social Security is under siege from House Republicans.

It should be noted that Social Security is not actually bankrupt—it has enough current income to pay ¾ of benefits from income.   Its big problem is that with growing inequality, less and less of income is taxed to support it.  No one is fixing that problem.

Infrastructure:  Problems have been well-documented and were acknowledged by both candidates in the election.

>> From the State of the Union speech, Trump expects the states and the private sector to foot most of the bill for infrastructure.   States have no money, as noted earlier.  Private sector financing is historically limited and only goes where there’s money. Infrastructure work has the potential to help with both employment and competitiveness, but there is nothing left in the budget to make it happen.

Environment:  Technological change and lobbyist spending means that it is always tough to be one step ahead of industry.

>> The administration views all environmental regulation as the enemy.  The withdrawal from the Paris Climate Accords is part of that picture.  The EPA is a prime target of budget cuts.

International:  This is a period of growing interdependence but with increasing sources of instability.  The US used to lead in establishing order, and it profited from that role.   We have now abandoned that and are increasingly threatening unilateral military action.

>> The tax plan budget has extreme cuts to the State Department together with a large increase in spending for traditional military hardware.  The change of emphasis is unnerving, and the military part eats up a large part of the budget after tax cuts.   One also can’t discount the real risk of conflict.

Conclusion:  The result of all this is how insecure life has become for many American families.  Employment has become riskier, government support has not evolved to help, and fundamental services such as education, healthcare, and infrastructure can no longer be counted on.  The new tax law makes all of that worse, because of specific policies (education, healthcare) and because there’s just no money left (infrastructure).   The government has been put out of the running to address the problems we actually have.

 

In final conclusion, we can sum it all up by saying this is a tax plan for a two-tiered American society, where the very rich are secure in their status and their ability to pass it on to their children—and the rest of us are performing without a net.  Middle class opportunities are there but shrinking, and it’s easy to fall out.  It’s hard not to think about the symbolism in the State of the Union address pagentry, where a crowd of overwhelmingly rich and overwhelmingly white people cheered wildly for the few others who were brought in to do the job of making them richer.

The State of Our Future

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After the many other commentaries on Trump’s State of the Union speech, there are two reasons for this one:

  1. Trump seems to have gotten away with more than he should have.
  2. We seem to understate the magnitude of the danger.

On the first point it seems that Trump has pulled a truly remarkable sleight of hand.  The whole first part of the speech was about economic success.  He cited record low unemployment numbers as proof that his program was working and that the tax cuts would bring success.  To some extent this was the kind of distortion of reality we’ve come to expect, since Trump’s own job creation numbers were actually below all of Obama’s last five years.  What’s really shocking though is that he seems to have succeeded in using the ongoing mainstream world-wide recovery as a validation for the radically different and dangerous economics embodied in his tax plan!

Presidents generally can’t do much to change the economic situation in a first year, just because the ship is too big to turn around.   The numbers in the following job creation chart show just that for Trump.

job_creation

You can give the Republicans points for creative packaging of the results, but nothing more. (Today’s January statistics show more of the same.) That’s not surprising, since on economic policy Trump’s fights with Congress left him unable to enact much of anything before the tax cuts.  And the stock market had its own reasons for upswing—it has been overhanging the tax cuts all year, and that money will be going straight into profits.

By contrast, one cannot overstate the dangers posed by Trump’s economic plan.   We are doing a massive, deficit-funded stimulation of an economy at essentially full employment while eliminating all oversight of speculation and other bad behavior.  Economists expect that cannot end well.  It is at the least inflationary and likely worse.  The giddiness is beyond the level that gave us the 2008 crash, and this time there’s no guarantee that the people managing the crisis will remember the lessons of the 1930’s.  This is not a natural disaster or other unforeseeable event.  We are choosing to do this.

One revealing point: in his speech Trump boasted of the current strength of the American economy and talked about the urgent need to cut business taxes in order to make American companies competitive.  Say what you will, that doesn’t add up.  There’s a good reason why American companies are doing ok—in the aggregate they aren’t paying those high tax rates because of all the loopholes and other special provisions engineered by decades of lobbyists.  Real tax reform would have eliminated the loopholes, made the tax code more equitable, and paid for much of the rate reduction.   We didn’t do that; instead we just delivered a gift to companies and investors.  And we’re so excited about the gift that we can’t be bothered to look at consequences.

At this point in the business cycle we should be using our resources to make the country stronger.  Trump himself mentioned some of the problem areas that need focus:  the opioid crisis, infrastructure, job training (his first acknowledgement that business profits won’t help everyone).  All of those take money, and Trump’s speech said very little about that part.  The current Trump opioid plan is an unfunded joke.

This country and the rest of the world have come back from the 2008 crash to the point where we now have money to invest in infrastructure and people—including Trump supporters—and instead we’re giving it away and borrowing more to solve a problem that we don’t currently have.  That stimulus would have been handy five years ago; now it is a lost opportunity as well as an invitation to inflation (which certainly costs jobs) and another crash.

 

The economy, however, is only one of the danger areas mentioned at the beginning.  In an earlier note on policy risks we listed four areas of concern:  the economy, war, Russia, and climate change.  Trump’s State of the Union speech was worrisome in the other three areas as well.

War:  Trump spent a considerable portion of the last half-hour talking about North Korea.  This included two different sets of invited guests (the parents of murdered Otto Warmbier and the injured Christian defector Ji Seong-ho) to underscore his message of evil.  He blamed his predecessors for the North Korean problem, but presented nothing at all to show what he intended to do about it.  That omission made the episode eerie, particularly when we learned just before the speech that the administration ended the nomination process of a proposed ambassador to South Korea when the person expressed uneasiness about plans for “bloody nose” limited military actions.  Some commentators worried about preparation for war.

Russia:  Here the problem was not what was said but what wasn’t.   Russia was simply absent as a major concern.   In all the repeated military chest-beating there was no acknowledgement of past Russian behavior as a current threat.  The Russian regime has demonstrated its ability and willingness to penetrate public and private data networks including the NSA.  And Russians (inside and outside the state) are a major source of viruses as a kind of private cyberwarfare.  As a threat Russian cyberwarfare ranks with North Korea, but somehow it gets a pass.  (This recent article finally shows some concern in the press.)

Climate change:  Trump’s speech was a frontal attack on the whole idea of climate change.  He began with a list of natural disasters the country had overcome—including hurricane Harvey and the wildfires in California.  All his examples were cases that had been linked to climate change, and his mentioning them without comment showed how politically confident he felt in his climate denial.  He then went on to gloat about his (questionable) successes in pushing the energy sector and “clean coal” in particular.   For climate change there are many valiant efforts to work around Trump, but we should not believe that US behavior doesn’t matter.  International unanimity on climate change is crucial to stop cheating, and we—with probably the most to gain from the process—are the cheaters in chief.

 

Many people, including TV commentators, tend to discount State of the Union speeches as political hullabaloo without real consequences.   This one was more than that.   Not because Trump announced anything really new, but because it confirmed the crazy and dangerous path where he the “genius” is taking us.

As we’ve said before—people easily forget what happened with the last set of geniuses under George W. Bush.   We barely avoided catastrophe that time.   This time we have ample evidence that it will be worse.

As a country we have had many years of stability, so we tend to think somehow things will just work out.  In practice that means we try to normalize the craziness around us.  But we are abandoning peace and prosperity to follow lies and fantasy.  And once again, unless we change course, there will be hell to pay.